Potential Risk Class (PRC) matrix

An equity scheme's risk is fairly visible from its category name — a small-cap fund is understood to be riskier than a large-cap fund. A debt scheme's risk is harder to see from the name alone, because two funds called "corporate bond fund" can carry very different interest rate and credit risk depending on how the fund manager actually runs the portfolio.

The Potential Risk Class (PRC) matrix fixes that by disclosing, upfront, the maximum risk a debt scheme's fund manager is permitted to take — not merely the risk the portfolio happens to be carrying today.

SEBI classifies every debt scheme on a grid built from two parameters:

• Maximum interest rate risk, measured by the scheme's Macaulay Duration (MD); and
• Maximum credit risk, measured by the scheme's Credit Risk Value (CRV).

Each debt scheme is placed in a cell of this matrix based on the ceiling it discloses for these two parameters — not its current holdings, which can be anywhere within the disclosed ceiling. The framework does not force AMCs to reshuffle their existing scheme categories: AMCs continue to retain the same category of their schemes, and they have full flexibility to place single or multiple schemes in any cell of the PRC matrix, as long as the scheme's actual portfolio stays within the disclosed limits.

The matrix has been effective from 1 December 2021.

Consider two hypothetical corporate bond funds from different AMCs, both permitted to invest predominantly in AA-and-above rated paper.

Fund X discloses a PRC cell combining a moderate interest rate risk ceiling (say, a Macaulay Duration band of up to 4 years) with a low credit risk ceiling (a CRV floor that keeps it close to the highest-rated end of AA-and-above).

Fund Y, also called a corporate bond fund, discloses a PRC cell combining the same moderate duration ceiling with a relatively higher credit risk ceiling — permitting it to hold more of the lower end of its rating band.

An investor comparing only the two funds' names and their stated "corporate bond fund" category would see no difference. Reading the disclosed PRC cell for each shows that Fund Y is permitted to run materially more credit risk than Fund X, even though both stay within the same broad scheme category and both are marketed as investing in similar quality paper.

Chapter 4 (Legal and Regulatory Framework), in the footnoted discussion of scheme categorisation and rationalisation, immediately after the point that a fund house may run only one scheme per category. Expect a definitional question on the two parameters (Macaulay Duration for interest rate risk, Credit Risk Value for credit risk) and the 1 December 2021 effective date.

• The PRC matrix discloses a ceiling, not the scheme's current holding. A scheme can run well inside its disclosed cell; the matrix bounds what the fund manager may do, not what the portfolio necessarily is doing today.
• Macaulay Duration measures interest rate risk; Credit Risk Value measures credit risk — do not swap which parameter measures which risk.
• AMCs keep their existing scheme categories under the PRC framework — this is an additional risk disclosure layered on top of the categorisation and rationalisation circular, not a replacement for it.
• A single AMC can place multiple schemes in the same PRC cell, or spread its schemes across different cells — there is no one-scheme-per-cell restriction analogous to the one-scheme-per-category rule.